If the Company expands property, plant and equipment, it needs to borrow $800 million with an...

If the Company expands property, plant and equipment, it needs to borrow $800 million with an amortized (principal and interest) payment loan for 8-years at 3.00%. First, determine the annual payment (end of year) for the Company to fully repay the loan. Second, will the Company be able to deduct the full annual payment from Operating Profit and thereby reduce Income Before Income Taxes and taxes paid? Why?

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Expert Solution

Yearly payment (principal and interest)= $113.97 million

Details of calculation is given below.

Company will not be able to deduct the full annual payment from Operating Profit and thereby reduce Income Before Income Taxes and taxes paid. Because, the annual payments comprise of principal portion as well as interest. Out of this, interest alone is expense to be deducted from operating profit. Principal portion goes to reduce liability in balance sheet.

jeff jeffy answered 1 year ago

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